GRC QUESTIONS
Day # 3 PIF GDP Program – Assessment Week – GRC Duration : 7 hours (Including the two breaks) Timing : 10.00 am to 5:00 pm Startrek Corporation Startrek Corporation was an energy, commodities, and services company based in New York. In the late 2000s, it was one of the largest companies in the world, widely admired for its innovation and rapid growth. Startrek Corporation, began its journey as a modest energy company. Founded by Daniel Emerl, Startek quickly rose to prominence in the energy trading market, pioneering new strategies and technologies that revolutionized the industry. Under the leadership of CEO Jenifer D Skin and CFO Andrew Williams, Startrek embarked on an ambitious expansion plan, diversifying its operations into various sectors beyond energy. Under the leadership of Daniel Emerl, the company’s founder, Startrek leveraged SPEs to diversify its investments and pursue growth opportunities beyond its traditional energy trading market. By establishing separate legal entities with their own distinct assets and liabilities, Startrek could pursue ventures in new sectors while minimizing the impact on its overall financial health. These entities, typically created for a specific purpose or project, allowed Startrek to compartmentalize certain assets, liabilities, and risks, thereby shielding its core operations from potential volatility or adverse outcomes. Startrek engaged in long-term energy contracts or derivatives agreements, marking them to their estimated market value at the time of reporting. This approach enabled Startrek to promptly recognize potential future profits from these contracts on its financial statements, rather than deferring recognition until the profits were realized over time. No questions were raised on the workings of these contracts by any internal or external stakeholder. While mark-to-market accounting provided Startrek with flexibility and agility in assessing its financial position, it also posed risks. The inherent volatility of energy and commodities markets meant that the estimated market values of contracts could fluctuate widely, impacting the company’s reported earnings and financial health. Startek’s success was fueled by its innovative practices, including the creation of complex financial structures such as Special Purpose Entities (SPEs) to manage risk and maximize profits. These offbalance-sheet entities allowed Startek to conceal debt and inflate earnings, painting a rosy picture of financial health to investors and analysts alike. The company had been providing financials of the SPEs in the annual report, though they had secured the exemption to present the consolidated financial statement. The company established an audit committee, but its members lacked the necessary background or experience to grasp the complexities of these transactions and financial statements. Furthermore, the financials were adopted and approved at shareholder meetings without any questions or objections. 1 WWW.KAPLANPROFESSIONALME.COM The board of the company was well composed but they have been failing to meet periodically. Most of the time, key members of the board have been found to be missing from the meetings and have also abstained from voting on some of the critical management decisions. The internal and external auditors of the company have been with the company for over a decade. They personally know most of the senior management and are often seen to hangout socially. The scope of the internal auditor has also been limited and not reviewed since the date of their appointment. The lender has been getting their repayment on time though most the reporting requirements, as per the loan sanction letter, have been failing. Since banks have been getting their repayment on schedule they did not bother to raise the voice for reporting. The financial performance of the company over the last three years has been , as follows Income Statement ($ Mn) Particulars Revenues Cost of Revenues FY 1998 31,260.00 -29,562.00 1,698.00 5% -912.00 786.00 3% 96.00 -3.00 882.03 3% FY 1999 42,223.00 -38,266.00 3,957.00 9% -3,058.00 899.00 2% 124.00 -60.00 1,023.02 2% FY 2000 1,00,789.00 -94,361.00 6,428.00 6% -5,066.00 1,362.00 1% 297.00 -117.00 1,659.01 2% Particulars Fixed Assets Deposits Accounts Receivables Bank A/c Total Assets FY 1998 85,155 30,000 17,150 696 1,33,001 FY 1999 85,155 45,000 34,041 1,200 1,65,396 FY 2000 85,155 60,000 91,803 3,610 2,40,568 Current Liabilities Secured Loan Unsecured Loan Capital Total Liability 636 7,583 1,500 1,23,282 1,33,001 2,890 7,583 31,500 1,23,423 1,65,396 24,426 7,583 84,500 1,24,059 2,40,568 Gross Profit Oprating Expenses Operating Profit Other Income Finance Cost Net Income Balance Sheet ($ Mn) 2 WWW.KAPLANPROFESSIONALME.COM Despite its outward success, cracks began to appear in Startek’s facade. Concerns arose over the company’s opaque financial disclosures, aggressive accounting practices, and rapid expansion into unfamiliar territories. Startek’s stock price soared to unprecedented heights, but doubts lingered about the sustainability of its growth model. As Startek’s financial web grew increasingly tangled, so too did the risks. Executives, driven by greed and hubris, engaged in fraudulent activities to maintain the illusion of prosperity. Internal auditors, extensively trading the shares of the company, also concealed the facts. Insider dealing, conflicts of interest, and manipulation of financial statements became commonplace, eroding the company’s integrity from within. Regulatory agencies, such as the Securities and Exchange Commission (SEC), failed to detect and prevent Startrek’s fraudulent activities, highlighting weaknesses in the regulatory framework and enforcement mechanisms. In December 2001, Startek’s house of cards came crashing down. The company filed for bankruptcy, shocking the financial world and sending shockwaves through global markets. Thousands of employees lost their jobs, pensions evaporated, and investors saw their savings vanish overnight. The Startek scandal, once considered the pride of American capitalism, became a cautionary tale of corporate greed, deception, and hubris. The Startrek scandal led to increased scrutiny of corporate governance practices and regulatory reforms, including the Sarbanes-Oxley Act of 2002. 3 WWW.KAPLANPROFESSIONALME.COM Reflect 1. Please read the case study carefully and identify 5 red flags you come across. (5 Marks, One for each correct answer) One has been done for your reference. Answer SN 1 2 3 4 5 6 Red Flags (One Mark Each) Non transparency (Opaque) in financial disclosure 2. For each of the five risks identified in question 1, suggest 2 control measures. (10 marks, 2 for each of the correct control measures identified for the 5 risks.) One has been done for your reference. Answer SN 1 2 3 4 5 6 4 Red Flags Non transparency (Opaque) in financial disclosure Control ▪ Formation of proper and effective accounts and audit committee who shall review and approve the accounting polices and practices being followed. ▪ Periodical review and audit by internal and external auditor, commenting on the financial disclosure and compliance with the guidance / requirement of the respective authorities. ▪ ▪ ▪ ▪ ▪ WWW.KAPLANPROFESSIONALME.COM 3. Identify 3 triggers, based on the given financials (3 marks, 1 for each of the correct triggers identified), and suggest 3 controls for each of them (9 marks, 1 for each of the correct controls suggested for the 3 triggers). (Total: 12 Marks). One has been done for your reference. Answer Trigger (1 Mark Each) Controls Inflated revenues with no improvement in margins ▪ ▪ ▪ ▪ ▪ ▪ ▪ Check orders confirming to revenue Analyse and satisfy the reasons for increased revenue Check collection / aging of debtors Check communication with debtors in case of delayed realisation Check regulatory filings to cross check reported revenue Check trends (Is it year-end / quarter end sales?) Check third party statement ▪ ▪ ▪ 4. Identify 1 right for each of the stakeholders in the list below? (5 marks, One mark for each correct answer). Total (5 Marks) One has been done for your reference. Answer Right (1 Mark Each) Stakeholder • • • Board Right to create committees Right to Appoint and Remove Officers including auditors Right of overseeing Governance and Management Shareholders Internal Auditors External Auditors 5 WWW.KAPLANPROFESSIONALME.COM Lenders Employees 5. Do you think if all or any of them had exercised the rights at the proper time, the situation would have been different? (5 Marks, one for each correct identification). Please justify considering facts from the case (10 marks, 2 marks for each correct justification). (Total: 15 Marks). One has been done for your reference. Answer Right Exercised (Yes / No) – 1 Mark Each Stakeholder No. Board Justify based on the case – 2 Marks Each Board failed to design and maintain the required governance Shareholders Internal Auditors External Auditors Lenders Employees 6 WWW.KAPLANPROFESSIONALME.COM 6. Identify 3 major failures on the part of the internal auditors (3 Marks)? Please explain and highlight the implications for the 3 failures identified. (6 Marks, 1 each for explanation and implication for the 3 failures identified. (Total 9 marks) One has been done for your reference. Answer Failure (1 Mark Each) Explanation (1 Mark Each) Inadequate Risk Assessment Failed to conduct comprehensive risk assessments to identify and evaluate the various risks – – risks related to financial reporting, compliance , operational processes, and strategic initiatives – 7 WWW.KAPLANPROFESSIONALME.COM Implications (1 Mark Each) Without a thorough understanding of these risks, internal auditors may not have been able to – prioritize audit activities effectively or evaluate and implement appropriate controls to mitigate risks
Collepals.com Plagiarism Free Papers
Are you looking for custom essay writing service or even dissertation writing services? Just request for our write my paper service, and we'll match you with the best essay writer in your subject! With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers.
Get ZERO PLAGIARISM, HUMAN WRITTEN ESSAYS
Why Hire Collepals.com writers to do your paper?
Quality- We are experienced and have access to ample research materials.
We write plagiarism Free Content
Confidential- We never share or sell your personal information to third parties.
Support-Chat with us today! We are always waiting to answer all your questions.
